To ease investing headaches, please consider a dose of CVS

Friday

Apr 20, 2012 at 12:01 AM

Lauren Rudd

The heated rhetoric from Wall Street each time the subject of regulation is raised shows little more than greed and political bias. Those who complain that regulations only suffocate the Street's ability to operate in an efficient and competitive manner are espousing ignorance, are clueless -- or fervently hope you are.

And the Street does not limit itself to taking advantage of the less informed or less fortunate. MF Global, a major global financial derivatives broker whose credentials included the prestigious honor of being one of 21 primary Treasury dealers, reported a shortfall in customer accounts of $891,465,650 last Oct. 28 as it declared bankruptcy.

Further debasing the blanket of investment trust relied on by so many for financial security has been the uprooting of the deluding fantasy that share prices of quality companies somehow always rise to the occasion.

One way to mend a tattered mantle of financial security is to actively manage your investments using both tactical and strategic asset-allocation strategies. And while a strong dividend yield is certainly the preferred avenue in today's volatile environment, the potential for capital appreciation, sans dividends, can also make for a compelling story.

If the preceding prose has caused you a bit of a headache, you just might find some relief at CVS Caremark, a chain of 7,000 retail pharmacies and more than 500 retail health clinics. CVS is also one of the nation's largest pharmacy-benefit managers following its $27 billion merger with Caremark in 2007. Of greater interest is the fact that the shares of CVS are up 7 percent this year and have a three-year average annual return of 14 percent.

CVS serves about five million customers a day and generates about 70 percent of its revenue from prescription sales. The rest comes from the front of the store. It is a high-volume, low-margin business, with same-store sales growth of just 0.8 percent last year.

CVS also owns MinuteClinic, which serves patients with routine issues, to take advantage of the dearth of primary-care physicians. MinuteClinic, bought by CVS in 2006, has seen 11 million visits since its founding.

During 2011, CVS revenues increased 11.8 percent to a record $107.1 billion, with adjusted earnings of $2.80 per share, an increase of 5.9 percent if you exclude a $0.03 per share tax benefit from the prior year. For the purists among you who want the more precise "generally accepted accounting principles," or GAAP numbers, then earnings from continuing operations were $2.59 per share. CVS also generated free cash flow of $4.6 billion and cash flow from operations of $5.9 billion.

But the critical issue is not the past but the future. How well will CVS do going forward? In its latest guidance, CVS projected 2012 full-year earnings of $3.18 to $3.28 per share, while its GAAP earnings from continuing operations are projected at $2.96 to 3.06 per share.

The company also raised its FY 2012 free cash flow guidance by $300 million, to a range of $4.6 to $4.9 billion and now expects to generate cash flow from operations in 2012 in the range of $6.2 to $6.4 billion, assuming the completion of $3 billion in share repurchases.

In January, CVS received a large influx of customers when Express Scripts and Walgreen parted company. CVS has said the additional business probably added 3 cents a share to its earnings in the first quarter.

If you want a second opinion, consider that Standard & Poor's has rated CVS a strong buy, with a $54 target price and the expectation that total sales will rise 12.5 percent to $121 billion.

A discounted earnings model, using a 15 percent discount rate and an 11.83 percent growth rate, yields an intrinsic value for the shares of $51. The more conservative model of free cash flow to the firm suggests an intrinsic value of $70 per share if you use a discount rate of 6.98 percent, which is the company's weighted cost of capital. The shares recently closed at $43.60.

My earnings estimate for FY 2012 is $3.25 per share, with a 12-month target price of $52, for an 18 percent capital gain. In addition, there is an indicated dividend of 1.50 percent.